Paloma Ortiz is thinking about investing in some residential income-producing pr

Question

Paloma Ortiz is thinking about investing in some residential income-producing property that she can purchase for $240,000. Paloma can either pay cash for the full amount of the property or put up $60,000 of her own money and borrow the remaining $180,000 at 8% interest. The property is expected to generate $25,000 per year after all expenses but before interest and income taxes. Assume that Paloma is in the 25% tax bracket.

a.Calculate her annual profit and return on investment assuming that she pays the full $240,000 from her own funds. Round the answer to two decimal places.

Explanation / Answer

Annual Profit After taxes = $25000*(1-25%) = $18,750 ..........Ans (1) RoI = Annual Profit after tax/Initial Inv = 18,750/240,000 = 7.81% ....Ans (2)

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